17.10.201800:45 Forex Analysis & Reviews: EUR/USD: Germany, Brexit, Saudi Arabia are on the agenda

The past weekend changed the mood of traders in many ways, so some currency pairs opened with a gap. Basically, the British currency suffered - together with the dollar, it was back again in the 30th figure. But the euro also felt the consequences of an informative weekend, sifting in almost all pairs (except for the EUR/GBP cross-pair).

The main reason for the downward gap of the EUR/USD and GBP/USD is Brexit. In general, all the news related to the negotiation process can be divided into two parts: "we almost agreed" and "everything is gone". Over the past few months, traders have been forced to react to the contradictory information background, which changes its color with surprising frequency.

Thus, at the end of last week, representatives of the negotiating group confirmed rumors that the parties had reached a compromise on many key issues (primarily regarding the fate of the Irish border), and on Monday, that is, today, the world can see a draft version of the future deal. The headlines of newspapers and internet resources are full of reports that the agreement will be signed before October 17, that is, before the official EU summit. Taught by the bitter experience of the Salzburg summit, traders reacted poorly to anonymous rumors spread by news agencies. But in this case, promising statements were made by the main negotiator from the EU, Michel Barnier, so both the pound and the euro "believed" the words and rose against a basket of major currencies.

Opposite information appeared during the weekend: as stated by the Ministry of Brexit, the problem of the Irish border remained unresolved, so it is too early to talk about the key agreements. American news agencies, referring to anonymous sources in the EU leadership, reported that the negotiations had finally stalled and any breakthrough in the coming days should not be expected.

At the beginning of trade, the European currency weakened due to its "own" reasons: in addition to the problem with the Italian budget, added another reason for concern – the results of the German elections to the local Bavarian parliament. For the first time in 60 years, the Christian Social Union, which is part of Merkel's coalition government, has lost the support of the Bavarians and the absolute majority.

In the context of the foreign exchange market, this fact is not even alarming (although the issue of political stability in Germany strongly influences the position of the euro) - here the growth of anti-European sentiment is of great concern. The far-right party "Alternative for Germany" took third place after the "greens" with a result of 11%. The right advocates a tough anti-immigration policy, as well as for secession from the European Union. In the last general elections, representatives of the "Alternative" also went to the Parliament, but were "isolated" and de facto cannot influence the legislative process. The results in Bavaria suggest that in the next general parliamentary elections, the far right may show a higher result, reflecting the growing popularity of eurosceptics.

Despite such a gloomy beginning of Monday, the euro-dollar pair, however, like the pound-dollar, did not continue to decline and even tries to regain lost ground. Why? Oddly enough, but the reason for the recovery of currency pairs again is the notorious Brexit. This morning there were encouraging signs that remain hopeful of a preliminary agreement on Wednesday, that is, within the framework of the summit. According to a number of sources, London and Brussels still managed to resolve the main differences and reach an agreement in principle. The details of the future transaction are not discussed even on condition of anonymity, not to mention the official comments. But even the ghostly hope for a "soft" Brexit has an impact on the market, as much is at stake – from the perspectives of monetary policy to the question of financial stability in Europe and Britain.

Also, we should not forget the weakness of the greenback, which is under the pressure of indistinct US inflation: the dollar index could not return to the area of 95 points, confirming the uncertainty of dollar bulls. In addition, traders do not seem to know how to respond to the new hotbed of geopolitical tension. We are talking about relations between the United States and Saudi Arabia, which for the first time in a long time "broke pots" - Donald Trump responded to the alleged murder of journalist Jamal Hashkaji, who criticized the actions of the ruling elite of Riyadh.

The American President threatened "very powerful measures" against the Kingdom, if evidence of their involvement in this incident is found. In response, Saudi Arabia hastened to report that it is ready to reduce the volume of oil produced, as well as to take other retaliatory measures on an incommensurable scale that will affect the US economy. Here it is worth recalling that in August, the Saudis reacted very harshly to the post on Twitter of a Canadian official who voiced his criticism about human rights violations in Saudi Arabia. In response, Riyadh froze trade relations with Canada and deported the country's ambassador, also ordering all Saudi students to return home. Therefore, the current conflict between the United States and Saudi Arabia may receive a larger continuation.

Thus, the events of the past weekend could not determine the vector of movement of the euro-dollar pair. The Brexit issue has remained in limbo, the consequences of the elections for the Bavarian Parliament are too long-term and indirect, and the conflict between Washington and Riyadh can weaken the dollar's position. As a result, the pair froze in in the flat, waiting for further news impulses.

In technical terms, the bulls of the EUR/USD still need to overcome the 1.1620 mark (the middle line of the Bollinger Bands, which coincides with the Kijun-sen line on the daily chart) to confirm the strength of the upward trend. Until this happens, the pair may roll back to the first support level of 1.1522 (Tenkan-sen line) and to the base of the 15th figure.